Tuesday, November 14, 2017

I’d love to tell you I absolutely think the current Trump administration Department of Education is going to get the message that for-profit colleges are problematic, but I doubt it.

The Century Foundation has obtained data from the U.S. Department of Education through a Freedom of Information Act (FOIA) request which paints a very clear picture of issues surrounding for-profit schools and student loan fraud issues. I can’t wait to see the magic the Department of Education uses to make these facts go away or not be relevant.

“Out of the total of 98,868 complaints reviewed by TCF, for-profit colleges generated more than 98.6 percent of them (97,506 complaints). Of these complaints nonprofit colleges generated 0.79 percent (789 complaints) and public colleges generated 0.57 percent (559 complaints).

Approximately three-fourths of all claims (76.2 percent) were against schools owned by one for-profit entity, the now-closed Corinthian Colleges (75,343 claims). Removing Corinthian from the analysis, the vast majority of claims, over 94 percent, were still against for-profit colleges (22,160 of the 23,525 non-Corinthian claims).

Claims are concentrated around fifty-two entities—forty-seven for-profit companies and five nonprofit institutions—that have each generated twenty or more borrower defense claims. Of these five nonprofits, three converted from for-profit ownership.

The backlog of fraud complaints—currently numbering 87,000 not yet reviewed—is increasing, with the number of new claims submitted per month averaging approximately 8,000 since mid-August.”

The data uncovered while for-profit schools account for ten percent of student enrollment the students who attended were 1,100 times more likely to file a fraud claim.

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This article appeared onThe Get Out of Debt Guysite.
Steve Rhode is the Get Out of Debt Guy and has been helping good people
with bad debt problems since 1994. You can learn more about Steve here.

Thursday, September 28, 2017

During the First World War, it is said, the British military kept three sets of casualty figures: one set to deceive the public, a second set to deceive the War Ministry, and a third set to deceive itself.

Over the years, the Department of Education has released its annual 3-year student-loan default rate in the autumn, about the time the pumpkins ripen. And every year the default rate that DOE issues is nothing but bullshit. I can't think of another word that adequately conveys DOE's mendacity and fraud.

This year, DOE reported that 11.5 percent of the the 2014 cohort of debtors defaulted on their loans within three years and that only ten institutions had default rates so high that they can be kicked out of the federal student-loan program. That's right: among the thousands of schools and colleges that suck up student-aid money, only ten fell below DOE's minimum student-loan default standard.

Why do I say DOE's three-year default rate is fraudulent?

Economic hardship deferments disguise the fact that millions of people aren't making loan payments. First of all, DOE has given millions of student-loan borrowers economic-hardship deferments or forbearances that allow borrowers to skip their monthly loan payments. These deferments can last for several years.

But people who are given permission to skip payments get no relief from accruing interest. Almost all these people will see their loan balances grow during the time they aren't making payments. By the time their deferment status ends, their loan balances will be too large to ever pay back.

The colleges actively encourage their former students to apply for loan deferments in order to keep their institutional default rates down. And that strategy has worked brilliantly for them. Virtually all of the colleges and schools are in good standing with DOE in spite of the fact that more than half the former students at a thousand institutionshave paid nothing down on their loans seven years after beginning repayment.

Second, DOE's three-year default rate does not include people who default after three years. Only around 11 percent of student borrowers default within three years, but 28 percent from a recent cohort defaulted within five years. In the for-profit sector, the five-year default rate for a recent cohort of borrowers was 47 percent--damn near half.

DOE's income-driven repayment plans are a shell game. As DOE candidly admits, the Department has been able to keep its three-year default rates low partly through encouraging floundering student borrowers to sign up for income-driven repayment plans (IDRs) that lower monthly loan payments but stretch out the repayment period to as long as a quarter of a century.

President Obama expanded the IDR options by introducing PAYE and REPAYE, repayment plans which allow borrowers to make payments equal to 10 percent of their discretionary income (income above the poverty level) for 20 years.

But most people who sign up for IDRs are making monthly payments so low that their loan balances are growing year by year even if they faithfully make their monthly loan payments. By the time their repayment obligations cease, their loan balances may be double, triple, or even quadruple the amount the originally borrowed.

Alan and Catherine Murray, who obtained a partial discharge of their student-loan debt in bankruptcy in 2016, are a case in point. The Murrays borrowed $77,000 to obtain postsecondary education and paid back about 70 percent of that amount. But they ran into financial difficulties that forced them to obtain an economic hardship deferment on their loans. And at some point they entered into an IDR.

Twenty years after finishing their studies, the Murrays' student-loan balance had quadrupled to $311,000! Yet a bankruptcy court ruled that the Murrays had handled their student loans in good faith, and they had never defaulted.

DOE is engaged in accounting fraud. If the Department of Education were a private bank, its executives would go to jail for accounting fraud. (Or maybe not. Wells Fargo and Bank of America's CEOs aren't in prison yet.) The best that can be said about DOE's annual announcement on three-year default rates is that the number DOE releases is absolutely meaningless.

This is what is really going on. More than half of the people in a recent cohort of borrowers have not paid down one penny of their student-loan debt five years into the repayment phase of their loans. And the loan balances for these people are not stable. People who are not paying down the interest on their student loans are seeing their loan balances grow.

In short, DOE is operating a fraudulent student-loan program. More than 44 million Americans are encumbered by student-loan debt that totals $1.4 trillion. At least half that amount--well over half a trillion dollars--will never be paid back.

Betsy DeVos' job is to keep the shell game going a little longer, which she is well qualified to do. After all, she is a beneficiary of Amway, "a multi-level marketing company," which some critics have described as a pyramid scheme.

Sunday, May 28, 2017

At last the secret is out. The federal student loan program is out of control and millions of borrowers cannot pay back their loans. As the New York Times pointed out recently, student debtors are defaulting at an average rate of 3,000 a day--more than a million people went into default last year alone.But the Department of Education hacks who oversee the student loan program have been paying themselves performance bonuses. James Runcie, Chief Operating Officer for DOE's student loan program, received $433,000 in bonuses; and then he resigned rather than testify before the House Oversight Committee about what the heck was going on in the student loan program.And Runcie was not the only DOE executive to get bonuses. The National Association of Student Financial Aid Administrators (NASFAA) released a report earlier this month that provides some useful information about how DOE's bonus program works.As the NASFAA report explains, the Federal Student Aid Office (FSA) set performance goals for the organization and then basically assessed itself with regard to whether the office met those goals. According to NASFAA, "self-assessments are a common way to begin performance evaluations, but they are usually signed off on by a person or board with oversight responsibility." The Federal Student Aid office, however, let its own evaluations stand "without pushback, oversight, or accountability, which often easily allows the organization to excuse away failure to meet goals and targets."FSA's self-assessment program permitted senior executives to get bonuses if they excelled at their work. The program identified three categories of performance: "exceptional," "high results," or "results achieved." Note that there was not even a category for poor performance.Senior people who scored "exceptional" or "high results" were eligible for bonuses; and not surprisingly, performance scores got higher and higher as the years went by. In FY 11, "66 percent of senior FSA leaders received an "exceptional" or "high results" performance rating that qualified them for bonuses. In FY 2015, 90 percent of senior administrators got those ratings.Correspondingly, the percentage of eligible employees who only scored "results achieved," making them ineligible for bonuses, decreased from 34 percent to only 10 percent between FY 2011 and FY 2015.Bottom line is this: In FY 2015, 89.8 percent of FSA senior administrators ranked high enough to get a cash bonus, and 89.8 percent of those administrators got cash bonuses. How big were the bonuses? I haven't seen a list showing bonus amounts and who got them. Huffington Post reported that that at least one bonus was $75,000.No wonder Mr. Runcie resigned rather than answer questions before the House Oversight Committee. "I cannot in good conscience continue to be accountable as Chief Operating officer given the risk associated with the current environment at the Education Department," he is quoted as saying.

What the hell does that mean? I have no idea. It must be one of those phrases Mr. Runcie learned when he was getting his MBA at Harvard.

Friday, April 21, 2017

This excellent essay by Steve Rhode appeared earlier on the Personal Finance Syndication Network, PFSyncom and on Mr. Rhode's web site titled Get Out of Debt Guy. contains a variety of good advice and information about all manner of consumer debt problems, including student loans. You can learn more about Steve Rodes here.

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If the recent position by the Department of Education under the Trump
administration is any indication of what is to come for federal student
loan debtors, watch out.On March 16, 2017 the Department of Education rolled back protections
and policies impacting those who hold FFEL federal student loans. The
most recent numbers say about 4.2 million loan holders are in default on
these loans at this time. Millions will be impacted by this policy
change effective immediately as FFEL loan holder default.The Obama administration had issued guidance in 2015 that when
someone defaulted on a FFEL student loan that they had 60 days to bring
the loan back into compliance and current and avoid the tacked on
collection charges of up to 16% of the loan balance. This could be
accomplished through programs such as the student loan rehabilitation
program. It would all debtors to get back on track without exploding
their student loan balances with massive collection costs beyond the
already unaffordable amounts due.Under the Obama administration policies, “A guaranty agency cannot
charge collection costs to a defaulted borrower who, within the 60-day
period following the initial notice, enters into a repayment agreement,
including a rehabilitation agreement, and who honors that agreement.” – Source

The rationale given for this clarification was the distinction
between a debtor who defaulted but intended to repay and one who was not
going to make arrangements and thus cost significantly more to collect
from. If a debtor defaulted and then entered into a repayment
arrangement what would justify 16% of the loan balance in collection
costs? Nothing.But this policy of giving defaulted FFEL loan holders a grace period
to get back on a payment plan goes back to the 1980s and 1990s. This was
not an Obama policy.In 1986, the Department of Education adopted regulations to establish
the procedures for referring defaulted debt, which include giving the
debtor notice of the proposed offset and an opportunity to avoid the
offset by entering into a satisfactory repayment agreement. This policy
was restated in 1992 when the then Department of Education said “the
borrower could avoid the adverse consequences (report of the default
status of the debt, liability for collection costs, and further
collections actions) by making a timely agreement to repay the debt
voluntarily.”That’s all changed now. According to the “Dear Colleague” letter that
was just released, the Trump Department of Education is withdrawing
those policies and so debtors who default on FFEL student loans will
have no grace period and will now face large collection fees to be
immediately tacked on to the loan balance due. In essence, those who can
least afford the default will be penalized and have no incentive to
rehabilitate their loans. – SourceThe Betsy DeVoss Department of Education says the reason to roll back
these rules and policies is because there was an insufficient public
comment period when the policies were put into place. Does anyone really
believe the FFEL student loan debtors would argue against such a
policy? It leaves you wondering why the policy could not have been left
in place during a new public comment period and then a decision made. To
me it sure seems like a Ready-Fire-Aim approach at dealing with student
loan collections and student loan debtors in trouble.But then of course, the immediate and obvious beneficiary of such a
position is going to the be collectors and guaranty agencies who
administer those loans. What do you think? Comment below.Steve RhodeGet Out of Debt Guy – Twitter, G+, Facebook

Tuesday, December 20, 2016

In less than two weeks, Charlotte School of Law will lose all access to federal student financial aid money. CSL is a for-profit law school with an undistinguished reputation. According to Law School Transparency, an organization that gathers data on American law schools, only 46.3 percent of CSL graduates passed their bar exams in 2015. LST calculates that 50 percent of its 2014 freshman class had credentials so low that they were at extreme risk of failing the bar. LST also reported that not a single one of CSL's 2015 graduates obtained a federal judicial clerkship, another indication of CSL's mediocrity.

The Department of Education's decision to deny student aid money to CSL is probably the school's death knell. Most of CSL's students must take out student loans to pay CSL's extremely high tuition--about $44,000 a year.

The American Bar Association had already found that the law school was out of compliance with the ABA's accrediting standards, but DOE did not pull the plug on CSL solely for that reason.

Rather, as DOE's press release explained, CSL was found to have made misleading statements about itself to prospective students:

"The ABA repeatedly found that the Charlotte School of Law does not prepare students for participation in the legal profession. Yet CSL continuously misrepresented itself to current and prospective students as hitting the mark," said U.S. Under Secretary of Education Ted Mitchell. "CSL's actions were misleading and dishonest. We can no longer allow them continued access to federal student aid."

Without federal student-loan money, CSL won't survive long. And if the school closes, that will be a good thing for the legal profession and all the potential students who might have borrowed money to attend this extremely lackluster institution.

Nevertheless, even if CSL closes, hundreds of the school's graduates will suffer. Most have borrowed a lot of money to attend CSL; few obtained jobs that made the financial investment worthwhile.

DOE needs to do more than just cut off funds from one lower-tier law school. It needs to allow graduates of CSL and similar bottom-feeder law schools to discharge their student loans in bankruptcy.

And then DOE needs to get busy and shut off student aid money to some other law schools that have low admission standards and that are not placing enough of their graduates in well-paying law jobs. Here are some schools DOE needs to examine:

North Carolina Central University
Southern University Law Center
Appalachian School of Law
Florida Coastal School of Law
Ave Maria School of Law
Arizona Summit Law School

LST calculates that these schools admitted students with LSAT scores so low that 50 percent of their 2014 freshman class were at extreme risk of failing the bar exam.

And here are some more schools that bear watching:

Florida A & M University
Texas Southern
Mississippi College
Thomas M. Cooley Law School
Valparaiso University
St. Thomas University-Florida
University of North Dakota
Ohio Northern University
University of South Dakota
Barry University
University of La Verne

LST has identified these schools as ones that admit students with LSAT scores so low that 25 percent of their entering 2014 classes were at extreme risk of failing the bar exam.

DOE and the ABA must work together to raise the overall quality of legal education in the United States. As Kyle McEntee, writing for Law School Transparency, observed:

Charlotte School of Law is not the only law school operating shamelessly to the detriment of the legal profession. This school, like several dozen more, set large percentages of their students up to fail, leaving them with high debts, wasted time, no job, and no hope. It’s long pasttime for these schools to go.

ABA needs to rescind accreditation for some of these schools, and DOE needs to cut off federal funding for at least a dozen more law schools.

Monday, September 26, 2016

Last week, the U.S. Department of Education announced that it is stripping the Accrediting Council for Independent Colleges and Schools (ACICS) of its accrediting authority. As Donald Trump might put it, this is a HUUGE deal.

ACICS is the biggest accrediting body for the for-profit college industry. As of last June, ACICS accredited 245 schools enrolling about 800,000 students. All those schools must be credentialed by an accreditation agency approved by DOE in order to obtain federal student aid money. So when DOE decertified ACICS, it put more than 200 for-profit institutions at extreme risk of closing.

Why did DOE take such drastic action against ACICS?

Why did DOE take this drastic action? DOE accuses ACICS of lax oversight of the for-profit college industry. Two large for-profits filed for bankruptcy recently--Corinthian Colleges and ITT Tech; both companies were accredited by ACICS. Other for-profits have been investigated for fraud, misrepresentation, and high-pressure recruiting tactics.

The industry as a whole has notoriously high student-loan default rates. According to a Brookings Institution report, almost half of a recent cohort of for-profit students defaulted on their student loans within five years of beginning repayment. Ben Miller, a senior spokesperson for the Center for American Progress, approved of DOE's action: "With its lengthy track record of shoddy oversight--that has led to billions of dollars squandered--ACICS had abused the public's trust and could not be allowed to continue granting access to federal dollars."

What will happen to the 200 plus colleges and schools that were accredited by ACICS?

What will happen to the 200 plus for-profit colleges that are no longer accredited by a DOE-approved accrediting body? Assuming ACICS loses its appeal of DOE's decision, which seems likely, for-profit colleges will have 18 months to obtain accreditation by another DOE-approved accreditor. That will be very difficult to do--especially for small for--profit colleges, As one West Virginia educator explained: "There aren't thousands of accreditors that schools can go to, there's really just a handful. They all have very specific niches to fill." And those accrediting bodies will likely be deluged with applications from colleges that were formerly accredited by ACICS.

In short, the fall of ACICS will inevitably have a domino effect on for-profit colleges. Those that don't quickly become re-accredited by a DOE-approved agency will lose access to federal student-aid money and will collapse. When the colleges collapse, their students' studies will be disrupted. The vast majority of all for-profit students took out federal student loans to finance their tuition. If their college closes, they will have just two choices: They can transfer to another institution that will take their former college's credits or they can apply to DOE to have their loans forgiven under DOE's"closed school" exemption process.Does DOE have a sinister motive in disrupting the for-profit college industry?

The Obama administration will say its drastic action against ACICS is a justified response to the accreditor's shoddy oversight of the for-profit college industry. And maybe that explanation is sincere.

But why did DOE wait until the waning days of President Obama's second term in office to act? I wonder whether DOE might be intentionally disrupting the for-profit college industry so that inside players can step in and scoop up some faltering for-profit colleges in order to reap huge profits.

And Apollo Education Group, owner of the University of Phoenix, is being bought out by a consortium of equity groups led by Martin Nesbitt, President Obama's former campaign manager and president of the Obama Foundation. Tony Miller, a former Deputy Secretary of Education, will run the University of Phoenix. Cozy!

Time will tell us what is going on here. The for--profit college industry is a sleazy business, and I have argued repeatedly that DOE should shut it down. DOE's decision last week to strip ACICS of its accrediting authority is a big step toward doing just that.

But if we see more political insiders come in and buy struggling for-profits as Martin Nesbitt is doing with the University of Phoenix, that may be an indication, that DOE's death sentence for ACICS is nothing more than a calculated play to drive down the value of for-profit colleges so that powerful financial interests can scoop them up.

One thing we know for sure: Bill and Hillary Clinton are very close to the for-profit college racket. Bill, we remember, got paid nearly $18 million to serve as "Honorary Chancellor" of Laureate Education Group; and Hillary is tight with Goldman Sachs, which has an ownership interest in a for-profit education company.

Tuesday, August 2, 2016

Last month, St. Catharine College closed its doors for the final time. More than 100 faculty members and staff were laid off, and a federal court placed the college in receivership, which means a court-appointed overseer will manage the institution's assets on behalf of creditors.

St. Catharine's leaders blamed its closure on the U.S. Department of Education. DOE put the college on its "Heightened Cash Scrutiny" list, subjecting it to more onerous regulation of its federal financial aid money. College administrators said DOE's move was unjust and forced the college to close.

St. Catharine is one of 517 colleges and universities on DOE's latest "Heightened Cash Scrutiny" list, which includes proprietary schools, a few public universities, about 40 foreign institutions, and quite a few small liberal arts colleges like St. Catharine. Not all these schools will close in coming years, but some of them will.

For example, Shimer College is on the list; Shimer only has about 100 undergraduates. How long do you think Shimer will last? Pine Manor College, a small school in Brookline, Massachusetts, is also on the list. Pine Manor had about 500 students in the fall of 2015; and the total cost of attendance (tuition, room and board, etc.) is $43,000. How healthy do you think Pine Manor is?

Small liberal arts colleges all over the United States will be closing at an accelerating rate in the coming years. The cost of attendance is simply too high at these little schools. Of course, most small private colleges are now discounting their tuition rates for entering freshmen--on average, first-year students are only paying about 50 percent of the sticker price. But slashing tuition fees has not lured enough customers for many small colleges to keep their enrollments up.

I don't know enough about St. Catharine's situation to determine whether DOE treated the college unfairly. DOE may have had good reasons for putting St. Catharine on its "Heightened Cash Scrutiny" list. But it is fair to say that DOE's intensive meddling in college affairs has increased administrative costs for American colleges and universities. Small institutions--colleges with less than a thousand students--simply can't afford the mounting costs of complying with federal mandates.

For a major public university, new DOE mandates are manageable. The University of Texas, for example, can hire additional administrators to comply with federal regulations; and it has a battalion of lawyers who can draft updated university policies to comply with new federal regulations that are spewed out of Washington.

But the little colleges simply can't afford the cost of complying with ever more intrusive federal regulations--FERPA, the Clery Act, Title IX, Section 504, etc. And one by one, small liberal arts colleges will begin closing.

I foresee the day when American higher education will consist of three sectors: 1) secular public institutions, for-profit colleges, and elite private colleges and universities that have large endowments. Small liberal arts colleges, once a respected and important segment of American higher education, will soon be a thing of the past.

Clearly, a lot of small private colleges are in trouble. Last autumn, Moody's Investor Service predicted a sharp increase in the number of college closures, forecasting that 15 would close in 2017. I think Moody's is far too optimistic. By 2017, I think we will see three or four colleges shutting down every month.

What's going on? Several things.Small colleges have priced themselves out of their markets. First, many small non-elite colleges have priced themselves out of their markets. Tuition has been rising every year for the past 20 years, and even obscure little colleges now charge students from $30,000 to $35,000 a year, just for tuition. For years, students and their parents passively submitted to yearly tuition hikes; but no more. Mom and Pop aren't willing to pay $100,000 for Suzie or Johnny to get a bachelor's degree from an undistinguished private college.

It's true that small private colleges are heavily discounting their tuition--almost 50 percent for first-time freshmen. And it is true that students can take out student loans to pay for their college tuition. But families are not sure whether they will get a tuition discount big enough to fit their budgets or whether they are getting as good a discount as another family gets. They've lost trust in the integrity of the admission process.

And young people have finally begun reading the newspapers and are waking up to the fact that student-loan debt can be a financial death sentence for graduates who don't quickly find good jobs. They have become wary about enrolling at a little college named after a saint they've never heard of. Who in the hell is Saint Scholastica anyway?

Onerous federal regulations have raised operating costs. So price is a factor. But there is another reason why small colleges are closing. Federal regulation have become too onerous for small schools to manage. They simply cannot afford to comply with ever more burdensome regulations that spew out of the Department of Education. The Department's 2011 "Dear Colleague" letter on sexual harassment triggered a flurry of new college regulations, policies, and training programs to meet DOE's heightened standards for complying with Title IX. DOE's new transgender restroom rules will cost colleges money, and the rules will be a real headache for the little religious colleges that pride themselves on their traditional moral values.

Here's an example of how colleges are being subject to more and more federal regulation. Virginia Tech suffered a horrible tragedy when a deranged gunman massacred more than thirty students in 2007. The University was sued for negligence after the incident, but the Virginia Supreme Court ruled that Virginia Tech was not liable under Virginia tort law.

But the Department of Education concluded that Virginia Tech violated the Clery Act in the way it alerted students about an ongoing threat and assessed a fine against the University. The fine wasn't large compared to Virginia Tech's overall budget, but the University spent a lot of money defending against DOE's charge, and it will spend even more trying to make sure it does not run afoul of the Clery Act again.

Virginia Tech is big enough and rich enough to deal with DOE's mandates, but hundreds of small colleges don't have the resources for dealing with the ever growing complexity of the federal regulatory environment.

St. Catharine College is a case in point. It got squeezed by DOE, which held up its federal student aid money based on some technical issue. The college sued but apparently didn't get relief. This week it announced its closure, which it said was triggered by DOE sanctions.Small liberal arts colleges are headed for extinction and there is no way to revive them. Small colleges have implemented all sorts of strategies to keep their enrollments up and maintain their revenues. Many have tried to reinvent themselves by hiring marketing firms to enhance their images and juice their enrollments.

By and large, this strategy has failed. Let's face it: hiring a marketing firm to design an edgy college logo or a catchy slogan is no remedy for the massive problems facing the nation's small liberal arts colleges.

I don't see any way to revive the small liberal arts college. Their tuition rates are too high, and offering heavy discounts has not lured middle class students into small-college classrooms.

Moreover, the Department of Education does not care whether it is regulating small colleges out of business. The DOE minions probably gave each other high fives when they heard St. Catherine is closing its doors.

Nor is there any way for colleges to walk away from their total dependence on federal student aid and the federal regulations that come with it. The colleges drank the Kool Aid of federal student-loan money, and their is no antidote.

If you are an administrator or a professor at a small college and you are nearing retirement, perhaps you don't care about the demise of liberal arts colleges. As Marquise de Pompadour put it: "After us the deluge. I care not what happens when I am dead and gone." But a young person with a new Ph.D. would be a fool to try to build a career by taking a job at a small liberal arts college.

References

Another Small Private Closes Its Doors. Inside Higher Ed, June 1, 2016. Accesible at https://www.insidehighered.com/quicktakes/2016/06/01/another-small-private-closes-its-doors-dowling-college?utm_source=Inside+Higher+Ed&utm_campaign=a0fafeb056-DNU20160601&utm_medium=email&utm_term=0_1fcbc04421-a0fafeb056-198564813

Paul Fain. The Department and St. Catharine. Inside Higher Ed, June 2, 2016. Accessible at https://www.insidehighered.com/news/2016/06/02/small-private-college-closes-blames-education-department-sanction?utm_source=Inside+Higher+Ed&utm_campaign=3d1c6eed79-DNU20160602&utm_medium=email&utm_term=0_1fcbc04421-3d1c6eed79-198565653

Wednesday, April 13, 2016

The Department of Education announced this week that it will write customized letters to 387,000 disabled student-loan borrowers to inform them they are eligible for loan forgiveness. Good for the feds. DOE regulations authorize student-loan forgiveness for borrowers who are permanently disabled, but most people eligible for forgiveness don't apply. In fact, according to an Inside Higher Ed article, almost half of all disabled borrowers (179,000) are in default!

I applaud DOE for doing the right thing and reaching out to people who are entitled to have their student loans forgiven. This is a stark and pleasing contrast to the Department's position in Myhre v. U.S. Department of Education, when DOE opposed bankruptcy discharge for a quadriplegic debtor whose expenses exceeded his income because he had to pay a full-time caregiver to feed, dress, and bathe him.

Apparently, DOE is going to streamline the loan-forgiveness process for disabled borrowers. According to an article by Jillian Berman in Marketwatch:

The borrowers identified by the Department won’t have to go through the
typical application process for receiving a disability discharge, which
requires sending in documented proof of their disability. Instead, the
borrower will simply have to sign and return the completed application
enclosed in the letter.

DOE is to be commended for cutting through red tape to forgive these loans. Perhaps this streamlined approach can be expanded to include student-loan borrowers who were defrauded by the college they attended--particularly students who attended one of the Corinthian Colleges institutions. Thousands of former Corinthian students have applied for loan forgiveness, but the administrative process has been tedious.

This latest development provides more evidence of the massive suffering experienced by millions of distressed student-loan borrowers. Nearly 400,000 of them are permanently disabled!

Friday, April 8, 2016

A friend recently sent me an article from The Guardian about an artist using the name Fried Potatoes (Papas Fritas in Spanish) who sneaked into the vault of Universidad del Mar, a private university in Chile, and burned all the documents pertaining to the university's student loans. Yep, a half billion dollars in student debt went up in smoke.

What a cool idea!

Of course, destroying all loan documents pertaining to private college loans would be impossible in the United States. There are literally millions of student-loan documents in the U.S. involving hundreds of for-profit colleges. Most are in electronic format and the government maintains records of these debts, since the government guarantees all loans issued through the federal student-loan programs.

Still, some variation of this idea is worth considering. Let's start with Corinthian Colleges, which filed for bankruptcy last year and now has a $1.2 billion judgment against it for false advertising and misleading lending practices. A California judge ordered Corinthian to pay most of the judgment ($820 million) as restitution to former students who were victimized by its scam. The bulk of this money represents federal loans students took out to pay their tuition bills at one of Corinthian's campuses.

But of course Corinthian doesn't have the money to pay the judgment. At the time it filed for bankruptcy, it claimed to have only $20 million in assets--about one sixtieth of the total California judgment.

Department of Education regulations allow students to apply for loan forgiveness if they were students at a college that closed or if they were defrauded by the college they attended. Thousands of Corinthian alums have applied for relief under these regulations.

But the administrative process for resolving these claims has been tedious, and so far only a small number of ex-Corinthian students have had their loans forgiven.

Why doesn't the Department of Education do what Papas Fritas did and just dissolve the debt? Of course, DOE wouldn't need to actually burn all those loan documents, although I'm sure a bonfire would be personally satisfying to Corinthian's former students. But the loans could be forgiven by government fiat. And that is what DOE should do.

After all, Corinthian's former students will never pay back those student loans. In fact, almost half of all students who attended for-profit colleges eventually default on their federal student loans. Wouldn't it be easier and more just for the government to simply decree that any student who took out federal loans to attend a for-profit college will have those loans forgiven if the college is found guilty of fraud or misrepresentation?

Of course it would, but DOE will never take that straightforward step because the amount of money involved is enormous. It would rather deal with student claims through a cumbersome administrative process, knowing that most students won't go to the trouble of filing a claim.

And here's a better idea. Given the high levels of fraud, misrepresentation, price-gouging and totally worthless educational experiences connected with the for-profit college industry, I think we should simply allow anyone who took out student loans to study at one of these shyster for-profit institutions to discharge those loans in bankruptcy under the same standards that apply to other unsecured debt. In other words, people who are otherwise qualified for bankruptcy relief should have their student loans discharged through the routine process of a bankruptcy filing without the need of filing an adversary proceeding.

Saturday, March 12, 2016

In a March 11 press release, the Department of Education announced it is taking steps to protect students from predatory colleges. It's about time. The Obama administration has had seven years to clean up the for-profit college industry, and it has accomplished virtually nothing.

According to the press release, Acting Secretary of Education John B. King Jr. wants to stop colleges from forcing students to sign arbitration agreements that effectively insulate the colleges from liability for their wrongdoing. As DOE explained:

Forced
arbitration provisions used by many schools in their enrollment
agreements – often buried in the fine print – effectively prevent
students from seeking redress for harm caused by their school and hide
wrongdoing from the Department and the public. Such agreements often bar
students from bringing their legal claims in a group, making it
financially impossible for individual students to challenge schools.
Some agreements require disputes to be filed in secret tribunals where
little or no records are kept; some prohibit students from speaking
about the claims they file. The Department will discuss with negotiators
how to end such outrageous practices.

DOE also wants to "incorporate crucial elements of state consumer protection laws" in new regulations. This too is a good thing. But why did DOE wait so long?

And why is DOE seeking to enact reforms through a "negotiated rulemaking process"? These reforms should be nonnegotiable. All for-profit colleges should be subject to state consumer-protection laws, and all for-profits should be barred from forcing students to sign arbitration clauses that protect the colleges from liability for fraud and wrongdoing.

The next presidential election is eight months away. I predict nothing will get done regarding predatory for-profit colleges before Barack Obama leaves office. And we haven't hear a a peep out of Hillary about cracking down on this sleazy industry. No wonder young voters have rejected her.

Sunday, March 6, 2016

We live in an era of fraud in America. Not just in banking, but in government, education, religion, food, even baseball... What bothers me isn't that fraud is not nice. Or that fraud is mean. For fifteen thousand years, fraud and short sighted thinking have never, ever worked. Not once. Eventually you get caught, things go south. When the hell did we forget all that? I thought we were better than this, I really did

Mark Baum (played by Steve Carell)

The Big Short

The Big Short, the Academy-Award winning movie on the home-mortgage crisis of 2008, shows movie goers how greedy banking institutions created a housing bubble that burst in a shower of home foreclosures and trillions of dollars in financial losses.

A similar bubble has emerged in the federal student-loan program. And although the housing bubble is more complicated than the student-loan bubble, there are some eerie similarities between the collapse of the housing market a few years ago and the student-loan crisis. For example:

Hiding risk.The Big Short includes a scene in which Mark Baum, a skeptical investment banker played by Steve Carell, quizzes a representative of one the bond rating agencies--Moody's or Standard & Poor. The rating-agency representative admits that the agency gives mortgage-backed securities the highest rating--AAA--even though the agency knows that many of the instruments are packed with risky home mortgages that are headed for foreclosure.

Something similar is happening in the federal student-loan program. Although the Department of Education recently announced that student-loan default rates went down last year--especially in the for-profit sector, that's not really true. The for-profits have been aggressively signing up their former students in economic-hardship deferment programs that excuse borrowers from making loan payments without being counted as defaulters.

When we look at the five-year default rates in the for-profit sector, the numbers are scary. Almost half the people who took out student loans to attend a for-profit institution default within 5 years of beginning the repayment phase on their loans. And two years after beginning the repayment phase, 3 out of 4 of these students are seeing their loan balances go up--not down--due to accruing interest that is not being paid down.

In short, about half the people who take out student loans to attend for-profit colleges don't pay back their loans. Clearly, this sector of the student-loan program is a train wreck.

Unsustainable rising costs. As many people still remember, the cost of housing went up rapidly during the early 2000s, with people buying homes and flipping them for huge profits over a matter of months or even weeks. Everybody was making money in real estate--until the housing market collapsed.

Similarly, America has seen college tuition costs rise faster than the inflation rate for many years. The cost of attending law school, obtaining an MBA, or studying at an elite private college has gone through the roof. I graduated from University of Texas Law School in 1980 and only paid $1,000 a year in tuition. If I enrolled at UT Law School today, it would cost me 36 times as much--$36,000 a year for Texas residents!

Of course, these tuition hikes can't be justified any more than the dizzying cost of a split-level home in Coral Gables, Florida in 2005. And of course, those costs must eventually come down. Already, law school enrollments have plummeted and the schools have lowered admissions standards to attract students. And the elite private colleges are now giving huge discounts on their posted tuition rates; the average freshman now pays about half the college's sticker price.

Hidden costs and fees. Finally, the home mortgage bubble was fueled by greed and fraud. The bankers who packaged mortgage-backed securities were not taking any risks--they took their fees from the transaction costs. The banking industry was selling toxic financial instruments to gullible investors, including pension funds and people invested in mutual funds.

Similarly, the college industry is charging a gullible public more than a liberal arts degree is worth, and the suckers enroll because, hey, going to Barnard or Brown or Amherst must be a good investment. And the colleges aren't assuming any risks. Their pliant students are borrowing from the federal student loan program, and the government guarantees the loan. Ivy League U doesn't care if its graduates default on their loans any more than Goldman Sachs cared what happened to the investors who bought their mortgage-backed securities.

And the fees! People who default on their loans get assessed huge collection fees and penalties. People are routinely going into the bankruptcy courts trying to discharge student-loan debt that is two or even three times the amount they borrowed due to accrued interest, penalties, and fees.

So if you haven't seen the Big Short, go see it. And as you watch this riveting drama, think about the student-loan program. A bubble is about to burst at a college near you.

Published Articles

About Me

Richard Fossey is a professor at the University of Louisiana in Lafayette, Louisiana. He received his law degree from the University of Texas and his doctorate from Harvard Graduate School of Education. He is editor of Catholic Southwest, A Journal of History and Culture.